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Wednesday, 13 June 2012

Opposing H&S Patterns

I laid out a number of options yesterday morning for likely direction. Bullish and bearish options #1 were straight breaks of the 1335 SPX resistance or 1290 SPX support levels respectively, but I mentioned that I thought these were less likely than the alternatives.

Bullish and bearish options #2 involved forming the right shoulder on a bearish H&S indicating to 1275 SPX, or forming the right shoulder on a bullish IHS indicating to 1405. The action yesterday was consistent with both of these H&S patterns and I'll run through how each option looks today.

Bullish option #1 is the straight break up through 1335 SPX area resistance. I still think this is a less likely option but in support of this option we have the SPY daily bollinger band chart, where you can see that the middle bollinger band, now at 131.58, has now acted as support for each of the last four trading days, with either the open or close very close to it each day. 1290 SPX is main support here in my view, but to test it we will have to see a conviction break below the middle band, currently in the 1311 area:

Bullish option #2 is that a large IHS is forming and this is still forming. I'm not posting them today but it's worth mentioning that similar IHSes are also forming on NDX and RUT. The right shoulder would ideally need at least another day or two for symmetry and the ideal right shoulder low would be a test of 1290-2 area support. This option is strengthened by the falling wedge that broke up on SPX last week and I've shown it on the 60min chart below with that falling wedge:

Bearish option #1 is off the table really, as a break down through 1290 SPX area support from here would now be bearish option #2, which is the bearish H&S forming on ES and SPX. I'll show that on the ES 15min chart today for two reasons. The first is to show that the H&S is more bearish on ES, with a target in the 1256 ES area (about 1261 SPX) rather than the 1275 SPX target on the SPX version. The second is just to note that negative and positive divergence on the 15min RSI has correctly signaled each of the last four highs and lows, and it is showing negative divergence at the moment, signalling a short term high in the current area after yesterday's rally:

I posted an SPX 60min chart yesterday on twitter showing both the bearish H&S and bullish IHS forming on the chart. I added that in theory we could see both play out, first the bearish H&S and then the bullish IHS, and that's worth bearing in mind. If that happened that would ideally happen intraday, as a close much below 1290 SPX would look bearish. It's also worth mentioning that the lower bollinger band on the daily SPX was at 1280 at the close yesterday:

On Vix I'm still watching a possible bearish H&S form. The key on this pattern would be a break of rising channel support just over 18. Short term the ideal right shoulder high would be higher in the 25 area and as with the IHS on SPX, this right shoulder needs another day or two for symmetry ideally:

The support trendline on the EURUSD bear flag is now showing extreme signs of wear and this would generally be a signal for a likely break downwards in the near future:

I've been posting the ZB chart every day recently, and that's because ZB is showing real signs of making a significant interim top. If so that would obviously support the IHS scenarios on equity indices. ZB is still in a potentially bullish broadening descending wedge that could deliver a possible double-top, but I've also marked in today the potential sloping H&S indicating to the 142 area. a break below the H&S neckline in the 147'15 area would look very bearish to my eye:

I'm leaning short for today unless we see a break over 1335 SPX resistance. Longer term I have to say that the IHSes on SPX, NDX, RUT and other equity indices are starting to look pretty good, and may well be supported by H&S patterns on bonds and Vix. If these complete forming and break the necklines then that should signal at least a strong rally and possibly a major low, though I'd be leaning strongly towards it just being a strong rally on the overall picture.

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